Transcript
Speaker: Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
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Speaker: This podcast was recorded for publication on the 10th of October 2024 by HSBC Global Research.
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Speaker: Hello, I'm Aline Van Dyne in New York and welcome to the Macro Brief.
Speaker: On today's podcast, we're going to be looking at what's behind the rally in gold.
Speaker: Over the past few months, gold prices have pushed to new highs, hitting a record price of just under $2,700 per ounce at the end of September.
Speaker: So with geopolitical risks, loosening central bank policy, fiscal risks, and of course, the fast approaching US election, all contributing, where could prices go from here?
Speaker: To find out, I'm joined in the studio by Jim Steele, our chief precious metals analyst, who's been watching the gold market for decades.
Speaker: Jim, welcome.
Speaker: And let's get straight to it.
Speaker: Why has gold been rallying?
Speaker: Thank you for having me, Aline.
Speaker: There's a number of factors that have driven the gold market higher.
Speaker: You know, the same 8 to 12 factors actually drive the gold market year after year.
Speaker: The trick in analyzing the gold market and trying to figure out where the price trends are is in which factors are motivating the market and how severe are they?
Speaker: Well, geopolitics has been elevated in the last few years.
Speaker: It's gone from basically lower level in the pack right to up front.
Speaker: And it's probably the principal driver of the market now.
Speaker: This goes back to even before the invasion of Ukraine, but has increased with the Middle East and, of course, tensions and rivalries in East Asia.
Speaker: That's, I think, the principal reason.
Speaker: But close seconds are the deterioration in fiscal balances, up until now, relatively high inflation, financial market uncertainties, and other related issues appertaining to geopolitical risks, such as, for example, trade frictions and things like that.
Speaker: This has produced a sort of cocktail that's really driven the market higher.
Speaker: You mentioned that there's a lot of different factors contributing.
Speaker: Does that mean the strength of gold, the extent of the rally, has been a bit of a surprise if there hasn't been one really strong catalyst?
Speaker: Well, yes, I think it has.
Speaker: And in fact, you know, you can trace really the etymology of this current move higher to late 2022, when we got an extraordinary amount of central bank buying, along with a lot of retail coin and bar buying.
Speaker: That retail coin and bar buying has since receded.
Speaker: And to some degree, the central bank buying has as well.
Speaker: But other things have moved in to take its place.
Speaker: And even, I think, seasoned observers of the market have been surprised by the robustness and the longevity of this rally.
Speaker: Let's put it into some historical context, because as we all know, history is one of your most favorite subjects.
Speaker: This has happened before in the sense that we've had record highs.
Speaker: Just explain where we are in a historical context.
Speaker: Yes, indeed.
Speaker: So gold is now, as you said, somewhat below $2,700 an ounce.
Speaker: And that's a nominal high, a record high, which got a great deal of press and is helping sustain the rally.
Speaker: Now, in 1980, January of 1980, which I remember, gold got to $850 an ounce.
Speaker: Well, translated into inflation-adjusted terms, basically, that's well above $3,200 an ounce.
Speaker: And depending upon which inflation measure you use, CPI or PCE or whatever, it could even be as close, closer to $3,400.
Speaker: So there is certainly historical precedence for the market to be at least $500 above where it is now.
Speaker: And the question is, will it move another $500?
Speaker: Yeah.
Speaker: And before we answer that, Jim, what were the drivers in 1980?
Speaker: Was it similar to that mix that you've described when we started chatting?
Speaker: Yes, but to a much greater degree.
Speaker: The geopolitical risks was more along the lines of U.S.-Soviet rivalry.
Speaker: At that time, the U.S. appeared to be on the losing side of the Cold War.
Speaker: We know that's not how it ended, but the U.S. and its allies were on the defensive very much at that time, post-Vietnam era.
Speaker: In addition to that, we had double-digit inflation all across the Western world and absolutely rampant inflation in what was then called the third world.
Speaker: It is now called the non-OECD or the emerging world.
Speaker: Fiscal imbalances were also poor, but maybe not as bad as they are now.
Speaker: But unemployment was also double-digit.
Speaker: And in fact, for those economic historians out there, that's where the term stagflation came from, a combination of stagnant growth and inflation.
Speaker: Now, as bad as things may be now, and I'm not arguing that they're rosy in all aspects, we're certainly nowhere near the conditions that we were in 1980 by any means.
Speaker: And that might argue that the gold market will not get to where we were back then.
Speaker: Right.
Speaker: So on that point exactly, Jim, what lies ahead?
Speaker: Some further possible gains?
Speaker: Is it going to turn around?
Speaker: What's going to be driving gold in the next year?
Speaker: I think we have to look at what is likely to sustain the market and what is the longevity of that, of those factors.
Speaker: Certainly debt to GDP ratios appear to be continuing to go higher.
Speaker: And the U.S. is a big offender in that regard, but not the only one.
Speaker: And no one has come up with a credible policy in any of the OECD world really to rein them back, not looking at any particular country.
Speaker: But we all seem to be in the same boat as far as that goes.
Speaker: So that's supportive.
Speaker: The other thing, too, is according to a recent World Economic Forum report and survey, central bankers and others are still looking for elevated geopolitical risks and
Speaker: That has actually superseded inflation, in their view, as the number one threat to world growth.
Speaker: So geopolitical risks are likely to sustain themselves.
Speaker: I certainly don't see any near-term conclusion to any of the hotspots around the world.
Speaker: We will have an election.
Speaker: The US elections are predictable.
Speaker: We know when they're going to happen.
Speaker: We know there's going to be a result.
Speaker: That might take some uncertainty out of the market.
Speaker: Also, we have real deterioration in the underlying physical markets.
Speaker: Over 50% of all physical gold is purchased in jewelry, in the jewelry markets.
Speaker: 70% of that is in the non-OECD markets.
Speaker: And they're very price sensitive.
Speaker: And at these prices,
Speaker: Jewelry demand is declining.
Speaker: Bar demand is under pressure.
Speaker: Coin demand is under pressure.
Speaker: So unless investors on the paper markets, asset managers, portfolio managers, people like that, unless they keep assuming more and more gold that is left on the table by the lack of physical activity, then prices will recalibrate lower.
Speaker: I think the other thing, too, you've got to watch is that the stimulus packages, if in China, if they galvanize the property or the equity markets, that would reduce the reason for the safe haven buying we've seen coming out of China.
Speaker: Really interesting, Jim, but I wanted to just pick up on a point you mentioned about jewelry, bringing it back to something that probably most of our listeners can relate to, jewelry that people have lying around.
Speaker: How much of the jewelry is being sold when prices reach these highs?
Speaker: Is that a source of new gold?
Speaker: Yes, it is, in that you put your finger right on the major supply increase.
Speaker: When I first started covering the gold market, 10 or 15 percent of supply was covered by recycling, sometimes less.
Speaker: As prices have risen,
Speaker: and central banks have ceased to sell gold and their buyers of gold now.
Speaker: We've seen recycling has catapulted into the second place and is not a rival to mining, but it's a large secondary source.
Speaker: And as prices have gone up above 2000, which they're well above now,
Speaker: We've definitely seen an increase in recycling, the handing in of old gold.
Speaker: And not only that, but coins and bars are being handed in as well.
Speaker: And this is seriously increasing the supply of gold, regardless of the fact that we think mine supply will be up next year.
Speaker: Anyway, at these prices, you can imagine producers are willing to squeeze out every ounce that they can.
Speaker: But the variable, the elasticity in the supply is in the recycling market.
Speaker: And that is going up rapidly.
Speaker: And does all that gold that individuals sell, you know, rings, etc., does it just get melted down and gets reused in the same way that newly mined gold is?
Speaker: Yes.
Speaker: Gold is never consumed, unlike coal, unlike oil, unlike grain.
Speaker: It is stored in some aspect somewhere, and that goes right back to antiquity.
Speaker: One might have gold that is from ancient Egypt.
Speaker: You don't know.
Speaker: Probably not.
Speaker: But it's an interesting possibility.
Speaker: It is.
Speaker: It's in a vault.
Speaker: It's in your drawer.
Speaker: It's in your drawer.
Speaker: It's somewhere.
Speaker: Interesting, Jim.
Speaker: So going back to the here and now, what can investors expect in terms of the gold market in the coming months and in 2025?
Speaker: Well, we have a lot of momentum buying in the market.
Speaker: We have a lot of CTAs.
Speaker: We have a lot of technical buying.
Speaker: And frankly, they're not going to retreat from the market until they get a strong sell signal, which would mean a big correction.
Speaker: Until then, I think we're likely to try to press higher.
Speaker: On the geopolitical front, something could happen.
Speaker: I'm certainly not saying it will, but one could look for deterioration and escalation in tensions in any one of a number of places.
Speaker: We still have a problem with fiscal imbalances.
Speaker: We could very well be pushed up to near that $3,000 level, but we do not think that would be sustained.
Speaker: And we do think the market would retreat.
Speaker: One point, and I would emphasize again, I think I mentioned earlier,
Speaker: is that gold has rallied an expectation of monetary easing.
Speaker: But if you look at the last six Fed easing cycles, gold stops rallying as you start the easing cycle.
Speaker: And I think the way to look at it is that markets, including the gold market, are anticipatory.
Speaker: So if we're not going to get a further push higher or say not a substantial push higher from a rapid group of rate cuts, which we're anticipating, then that could take some of the wind out of the sails.
Speaker: And also our FX team are forecasting a firmer dollar and that too would weigh on the gold market.
Speaker: So in some ways we've had the gold rush, but it's still looking pretty solid.
Speaker: Yes, I think the vast bulk of the rally is in.
Speaker: It's always very hard to call a top, but there's a life in the market yet.
Speaker: But we do see the more bearish clouds on the horizon.
Speaker: Jim, thank you so much and really appreciate also the look back in history.
Speaker: Thank you, Aline, and thank everybody for listening.
Speaker: Before we go, here are a few highlights from the rest of the team here at Global Research.
Speaker: Now, as we just mentioned, geopolitical risks are elevated given the conflict in the Middle East, and oil prices have risen by around $8 a barrel since Iran's attack on Israel.
Speaker: Kim Fustier, head of European oil and gas research, says that although the situation remains highly uncertain, spare capacity from the OPEC Plus members should help to absorb any oil supply shocks.
Speaker: Geopolitics has also contributed to elevated freight rates.
Speaker: So could these higher costs hamper progress on disinflation?
Speaker: Well, Shanela Rajanagam, trade economist, thinks that these concerns might be overdone, with her analysis finding that higher shipping costs only have a relatively small impact on core inflation.
Speaker: Meanwhile, in the FX markets, emerging market currencies have been energized by the Fed's easing cycle and China's policy stimulus.
Speaker: The question is, can this last?
Speaker: Paul Mackel, global head of FX research, is cautious.
Speaker: He says that large unknowns about China and the global economy, as well as uncertainty around the US election, could lead to substantial FX volatility.
Speaker: So if you'd like more details on anything we've discussed today, please email askresearch at hsbc.com.
Speaker: You can also follow us on LinkedIn at hashtag HSBC research.
Speaker: That's all we've got time for today.
Speaker: Thanks for listening and please join us again next week here on the Macro Brief.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
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